CalPERS considers lowering investment forecast

JUDY LIN, Associated Press

The board of California's largest public pension fund will decide Wednesday whether to lower its investment forecast, a move that reflects economic reality but also is likely to cost state and local taxpayers more while siphoning money from core government services.

The California Public Employees' Retirement System will vote on a committee recommendation to lower the fund's estimated rate of return from 7.75 percent to 7.5 percent to better reflect long-term investment gains and inflation. If approved, the lower forecast would require an extra $303 million a year from the state, of which about $167 million would come from the general fund at a time when the state is struggling with a $9.2 billion deficit.

The rest of the money, needed to make sure the fund can continue to pay its promised benefits, would come from a variety of other state funds.

Lowering the amount CalPERS expects to receive from investments also means the thousands of school districts, cities, counties and local agencies that contract with the fund to provide pension benefits will need to contribute more. Many of them urged the committee to avoid lowering the estimated return, saying they cannot afford to contribute more at a time when local governments throughout the state are facing budget deficits.

"We know the increase in contributions might be difficult for some of our employers, but it is the right course of action to protect the benefits of our members and their families," CalPERS chief executive Anne Stausboll said in a statement. "We have achieved and beat our current rate over the last 20 years and this change will help us continue that record by recognizing what the current financial markets can deliver."

If the latest cut is approved, school districts that contract with CalPERS to cover bus drivers, custodians and other employees other than teachers would have to kick in about $137 million more per year. CalPERS has yet to figure how much the change would cost cities, counties and local agencies that participate in the fund.

CalPERS' chief actuary recommended lowering the assumed annual investment return even more, from 7.75 percent to 7.25 percent, citing the risk to taxpayers in the future. But the fund's pension and health benefits committee on Tuesday voted 6-2 to ignore the advice and went with the higher estimate, meaning local governments will not have to contribute as much as they otherwise would have.

"We are sensitive to the severe pressure many employers face in order to meet budgets and make required contributions," said Priya Mathur, chairwoman of the committee.

Peter Ng, Santa Clara County's employee benefits director, wrote a letter opposing the half percentage point cut, warning that it would cost the county an additional $67.5 million staring in fiscal year 2013-14. Even the home of Silicon Valley has been hit hard in recent years as a result of the worst economic recession since the Great Depression.

"This additional cost to the county will undoubtedly result in more program and position cuts that will further reduce critical services to the community," Ng wrote.

In many cities and counties, the rising costs of public employee pensions and retiree health care have forced cuts to basic services such as law enforcement, parks and libraries.

The coastal city of Santa Maria also pleaded its case to CalPERS and warned that its tax revenue remains below 2007 levels, before the recession began. Last year, the CalPERS board rejected a recommendation to lower the rate of return to 7.5 percent.

"Board members at the time expressed concern that the lower figure would burden local governments when they were already facing financial strains," Santa Maria Mayor Larry Lavagnino wrote. "Those very real strains remain a significant obstacle today."

CalPERS staff is urging the board to take some action, warning that deferring tough decisions now will only push costs to future taxpayers. As of June 30, the fund was 74 percent funded and carried an unfunded liability of at least $75 billion.

"If new actuarial assumptions are not adopted, there is a risk that the benefits will not be pre-funded adequately and could result in additional cost being passed to future generations unless higher returns are achieved in the future," the fund's chief actuary, Alan Milligan, wrote in his report.

The $233 billion fund administers retirement benefits for more than 1.6 million California public employees, retirees and their families. It is the largest public pension fund in the nation.

CalPERS' discount rate was last changed 10 years ago, when it was lowered to 7.75 percent from 8.25 percent.

It has earned an average return of 8.4 percent annually over the past two decades, but the economy's gyrations over the past few years have pressured pension funds to take more precautions. For example, the fund recorded a 20.9 percent increase in the fiscal year that ended June 30, 2011, but had an increase of just 1.1 percent for the 2011 calendar year.

If CalPERS adopts the lowered assumed rate of return on Wednesday, the state and school districts would start contributing more in the fiscal year that starts July 1 while the rate would increase for municipalities and local agencies in the 2013-14 fiscal year.

According to the state Department of Finance, California is projected to contribute a total of $3.6 billion to CalPERS in the 2012-13 fiscal year. Lowering the investment rate to 7.5 percent would raise the contribution to more than $3.8 billion.

Last month the California State Teachers' Retirement System lowered its investment forecast for the second time in 14 months, acknowledging the prospect of lower market returns in the years ahead. The teacher pension system lowered its assumed annual investment return from 7.75 percent to 7.5 percent, increasing its projected unfunded liability by $5.9 billion.